Lighthouse : Developing a savings habit

It is a comfort to know that, should the unexpected happen, you have some money put aside to get yourself out of a short-term dilemma. It may be your car, your washing machine, your pet or your own health that requires an immediate amount of money spent on it. Whatever it is, it's important to have a financial buffer and developing proper savings techniques will not only help you to build up a fighting fund for short-term emergencies, but will also encourage you to save regularly as much as you can afford, giving you the benefit of financial security and independence for the longer term.

Not everyone has the same financial goals and your idea of what you can save each month may be on a different scale to someone else. The fundamentals stay the same and here are a few basic rules to consider.

Encouraging saving

Even if the amount you are able to save each month is small, it is still important and if the saving is seen as part of a larger financial goal, it can be easier to find the motivation. A recent report from the BBC showed that technology can play a role in encouraging us all to save. Apps load-up pictures of savings goals, like a car, or a first home, to your mobile phone. Then, as you save more towards your goal, the image becomes clearer. If you withdraw money, the picture starts to disappear. Prize-based savings such as Premium Bonds can also make saving money more tangible.

Your pension

The number of UK workers saving into a pension scheme has increased since the government introduced auto-enrolment to workplace pension schemes. Saving for retirement is now much easier and as a result, pension scheme membership has been steadily nudged up to over ten million people.

The minimum contribution to a workplace pension has recently gone up from 5% to 8% of your salary. You may be lucky and find that your employer has decided to pay the whole 8%. Legally however, they only need pay 3%, leaving you to pay the remaining 5%. While this is all good news, it is unlikely that contributions at this level will be enough to fund your ideal retirement, especially if you joined the scheme later in your career. You should not be lulled into thinking that your future prosperity is assured, but look at other ways to save and invest for your future.

If you are a member of a workplace pension scheme, it is worth checking whether your employer will match any increased contributions that you make. Contribution matching can help you build retirement benefits in your pot at a faster rate.

Paying off debts

Your priority might be to pay off your debts before you can think about saving and many people are deciding to do this while interest rates remain low. You may also consider that, conversely, low interest rates make saving less rewarding but don't use this as an excuse to avoid saving altogether.

Other ways to save

Whatever stage you are at in your career, it is worth developing a financial plan to which you can refer and adjust as your income changes. Making it a routine to check the plan, makes saving a part of your regular home admin and seeing the amount grow may even encourage you to save more. As your savings become more complex, you may want to consider working with a financial adviser who will be able to discuss your financial goals with you, suggest ways of broadening or protecting your investments and revisit your plan with you over the months and years.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.